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arXiv · 1111.4087

ADI finite difference schemes for the Heston-Hull-White PDE

Tinne Haentjens·Karel J. in 't Hout
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Abstract

In this paper we investigate the effectiveness of Alternating Direction Implicit (ADI) time discretization schemes in the numerical solution of the three-dimensional Heston-Hull-White partial differential equation, which is semidiscretized by applying finite difference schemes on nonuniform spatial grids. We consider the Heston-Hull-White model with arbitrary correlation factors, with time-dependent mean-reversion levels, with short and long maturities, for cases where the Feller condition is satisfied and for cases where it is not. In addition, both European-style call options and up-and-out call options are considered. It is shown through extensive tests that ADI schemes, with a proper choice of their parameters, perform very well in all situations - in terms of stability, accuracy and efficiency.

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Tinne Haentjens, Karel J. in 't Hout. 2011-11-17. ADI finite difference schemes for the Heston-Hull-White PDE. https://arxiv.org/abs/1111.4087

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